prpri Redemption of Preference Share under Companies Act, 2013 Redemption of Preference Share under Companies Act, 2013

BACKGROUND:

Company limited by shares can’t issue any preference shares which are irredeemable.

A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed:

A Company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders:

Source of Redemption of Preference Shares:

  • Preference shares can be redeemed only out of the profits available for distribution to its shareholders as Dividend
  • Preference shares can be redeemed only out of Preference shares can be redeemed only fresh proceeds of shares issued solely for the purpose of funding the redemption of the preference shares

Condition for Redemption of Preference Shares:

  • Fully paid-up preference shares can only be redeemed.
  • A Company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act and the preference shares may be redeemed:-

(a) at a fixed time or on the happening of a particular event;

(b) any time at the company’s option; or

(c) any time at the shareholder’s option.

Capital Redemption Reserve:

  • Capital Redemption Reserve: Where the redemption of preference shares are redeemed out of the profits available for distribution, a sum equivalent to the nominal amount of shares being redeemed shall be transferred to the Capital Redemption Reserve.
  • Utilization of CRR: The CRR shall be treated as the paid up share capital of the company for all purposes and can also be utilized for bonus issue of shares

Company is not in position to Redeem:

  • Where the company is unable to redeem its preference shares or is unable to pay the dividend due on the preference shares, the company can replace issue such amount of preference shares as may be necessary in order to meets its obligation towards dividend payment and also redemption of preference shares.
  • Redemption of preference shares by issuing new preference shares is subject to obtaining the consent of the preference shareholders (at least 75% of the shareholders) and also obtaining the approval of the Tribunal for such arrangement
  • The Tribunal shall order the company to immediately redeem the preference shares held by the shareholders dissenting to such arrangement. The issue of preference shares for purpose of redemption of unredeemed preference shares (along with the dividend) shall not be considered as an increase in the share capital of the company

PROCESS FOR REDEMPTION OF PREFERENCE SHARES:

Call Meeting of Board Director:

  • Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.
  • Attach Agenda of Board Meeting along with Notice.

Hold the Board Meeting:

  • Check the quorum of Board Meeting.
  • Pass Board Resolution for approval of Redemption of Preference Shares.
  • Present Letter for redemption of Preference Shares before the members of the meeting.

File Form with Registrar:

  • File SH-7 with Registrar within 30 days of passing of Resolution.
    • Certified True copy of Resolution.
    • Minutes of Meeting

CS Divesh Goyal(Author –Divesh Goyal is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

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6 Comments

  1. dharmesh says:

    Can 0 % Reedemable preference shares are redeembed at premium ?
    Whether ir is treated as a distribution liable to DDT under section 115QA ?
    Or amount to Dividen under section 2(22) ?
    Company is closely held company ?
    Please reply sir ?

  2. Harshit says:

    Sir, I want to know when Iam trying to file Form SH-7 for redemption of Preference shares out of proceeds of fresh issue of equity shares, then what figure of capital to be filed in Issued , Subscribed and Paid up capital. As when Iam feeding the figure of revised capital with preference share capital as zero, then while pre-scrutinisation of form, it shows error and says that capital structure is different with MCA Database. Please help me out.

  3. Kartik parasar says:

    can preference shares be redeemed out of current year profits even if there is negative opening reserve which makes total reserve as on date of redemption as negative?

  4. Pritesh says:

    Where in the Companies Act, 2013 or rules there under, is there any provision making it necessary to hold a EGM and pass a special resolution?

    Neither does Section 55 nor rules mention any shareholders meeting to be held.

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